CFTC Chairman and Market Participants Weigh in on the Transition to SOFR

On November 29, 2018, in remarks before the 2018 Financial Stability Conference in Washington, D.C., Chairman J. Christopher Giancarlo of the U.S. Commodity Futures Trading Commission (“CFTC”) supported the adoption of the Secured Overnight Financing Rate (“SOFR”) as the new benchmark for short-term unsecured interest rates. SOFR is currently produced by the Federal Reserve Bank of New York (“New York Fed”) and is based on transactions in the repurchase agreement transaction (“repo”) markets. Chairman Giancarlo’s statements and support of SOFR come on the heels of a series of market and regulatory developments relating to benchmark reform.

Since 2017, regulators and financial market industry leaders have been working to design alternative interest rate benchmarks. Significantly, in June 2017, the Alternative Reference Rates Committee (“ARRC”), an organization convened by the Federal Reserve Board (“FRB”) and the New York Fed, selected a broad repo rate as its preferred alternative reference rate. In choosing a broad repo rate, ARRC considered factors including the depth of the underlying market and its likely robustness over time; the rate’s usefulness to market participants; and whether the rate’s construction, governance, and accountability would be consistent with the IOSCO Principles for Financial Benchmarks.

Then, as we previously noted, the Treasury Department proposed a new rule (the “Proposed Rule”) in July 2018 for data collection of centrally cleared repos that would support and enhance the calculation of both SOFR and the Broad General Collateral Rate (“BGCR”). The Proposed Rule itself would require the submission of information by central counterparties with average daily total open repo commitments of at least $50 billion. In response, the Securities Industry and Financial Markets Association (“SIFMA”) submitted a comment letter in September 2018 arguing for the Proposed Rule. SIFMA believes that the Proposed Rule’s data collection will contribute to the overall robustness of SOFR and will aid SOFR’s viability as the alternative reference rate.

In his November 2018 remarks, Chairman Giancarlo advocated for the adoption of SOFR as the appropriate replacement for LIBOR and added that the CFTC is already working on the transition. For the CFTC’s part, the Commission’s staff is working with ARRC to support an efficient transition to SOFR by addressing any issues created by the CFTC’s current rules. In addition, the CFTC’s Market Risk Advisory Committee led by Commissioner Rostin Behnam is evaluating the issues related to the transition from LIBOR to SOFR. Chairman Giancarlo concluded his remarks by imploring market participants and firms to begin transacting in SOFR derivatives immediately, or else the development of a robust-term rate will be a challenge.